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Equity Basics
The Board has approved an equity final retirement distribution for customer accounts that have been closed since the year 2000. This final retirement distribution will occur in September 2008.
Equity is not in the form of cash or liquid assets. Equity is invested in the electrical system in the form of substations, poles, lines, transformers and other facilities.
In July, the Board of Trustees reviewed LCEC’s financial position in order to determine if a portion of equity capital could be distributed to members. While the region’s growth has leveled off, LCEC is still feeling the impact of the substantial investment in the infrastructure that was made to support several years of explosive growth. In order to make a general equity distribution, LCEC would have to borrow additional funds, and this could add pressure to increase electric rates. The decision was made to once again, not make a general distribution of equity returns for 2008. Our CFO/Director of Finance stated that "We are held accountable to operate the business in a fiscally responsible manner and this decision is in the best interest for the future of LCEC and its customers."
While a general distribution will not be made, customers who purchased power from LCEC during 2007 received an equity credit allocation to their equity account. The allocated credit will be part of their equity account balance; which will continue to be eligible for any future Board approved distributions.
What is equity capital?
Equity capital represents the customers’ share of net margins. Capital credits are the margins (profits) that are left over after all operating expenses are deducted from revenue. Equity capital is used to partially finance long-term capital projects, and a minimum level is required by lenders in order to extend loans to LCEC. A higher level of equity capital can reduce the cost (interest rate) of borrowed money.
What are net margins?
Net margins are what remains after expenses are deducted from the revenue earned by LCEC during the year.
Do all customers receive equity capital?
Customers are allocated equity capital annually if revenues exceed expenses. The amount of equity is determined by the amount of electricity the customer purchased during the year. The allocated equity capital accumulates in the individual member’s equity account.
If a customer has equity credit allocated to their account, why can’t they receive it in a lump sum?
The equity account is not a cash account; it reflects the value of ownership (equity) in LCEC and is invested in equipment and facilities. Equity also helps finance capital improvements such as electrical lines, poles, transformers and substations.
Is equity paid to customers every year?
Annually, the board of directors reviews LCEC’s financial position in order to determine if a portion of equity capital can be distributed (paid out) to members. There are certain mortgage clauses from our lenders that require LCEC to maintain minimum levels of specific financial ratios.